India-US ties shine at bilateral talks, except for this area

A generally positive tone has so far permeated the second U.S.-India Strategic and Commercial Dialogue (S&CD), a nod to the robust ties between two of the world’s largest democracies. But one aspect of the bilateral relationship still remains murky as ever, and it’s unlikely to see much progress during the two-day event.

“While the strategic dimensions of the India-U.S. relationship have seen very positive strides in recent years, as embodied in Indian Defense Minister Manohar Parrikar’s ongoing visit to the U.S, the commercial side has been a little underwhelming,” said Dhruva Jaishankar, fellow for foreign policy at the Brookings Institution India.

The two do not have a free-trade agreement (FTA), owing in part to India’s protectionist approach and a lack of political appetite in the U.S.

“U.S. goods exports to India have grown only 22 percent since 2008, and other trade indicators, including in services are not impressive. Indian exports have not grown in the past two years despite a much healthier economic outlook,” Jaishankar flagged.

New Delhi also lacks FTAs with the European Union (EU), Israel, South Africa, New Zealand, Australia, and Canada.

“We in the U.S. sometimes chalk India’s reluctance to embrace trade integration up to retained Nehruvian sentiments, a small team of negotiators, or other nonstrategic reasons. But there is a very real reason that India has continued its long-standing protectionist approach,” explained Richard Rossow, senior fellow at the Centre for Strategic and International Studies (CSIS) in an note earlier this month, alluding to the socialist policies adopted by India’s first Prime Minister Jawaharlal Nehru.

India suffers from a massive trade deficit with its largest trading partner, China, he flagged. Moreover, India’s agriculture sector isn’t globally competitive, so any trade agreement that includes liberalization of agriculture markets would be detrimental to New Delhi, he continued.

Washington’s attention meanwhile has been on larger regional pacts, including the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), both of which India is not a member of. But even with talks concluded on the TPP, Washington is unlikely to prod India.

“Anti-trade rhetoric during the election in the U.S., coupled with the priority given to TPP and TTIP, as well as frustrations with India paint a grim picture [for future agreements],” Jaishankar noted.

Economists have long warned that India’s attitude towards trade stands in contrast with the nation’s open-for-business image propagated by Modi.

While the government has expressed interest in joining the Asia-Pacific Economic Cooperation (APEC) bloc and Regional Comprehensive Economic Partnership (RCEP), the country’s recent trade-protection measures “far outweigh any verbal interest in trade integration,” according to Rossow.

Such measures include delayed implementation of the World Trade Organization Trade Facilitation Agreement in 2014 and adoption of a National Capital Goods Policy in May this year that critics say uphold high trade barriers, such as rules stipulating foreign capital goods manufacturers to source 30 to 40 of their inputs domestically.

India and the U.S. also lack a bilateral investment treaty (BIT). BITs protect the interest of foreign investors and are considered essential to stable investment flows; they can also boost growth in services trade. Negotiations first started in 2009 but a deal failed to materialize despite affirmations of mutual commitment from both leaders.

Aside from trade, there are a few other thorny issues that could dampen the mood at the S&CD, which officially began Tuesday. U.S. Secretary of State John Kerry is expected to meet Modi on Wednesday.

“The U.S. and India will continue to disagree over U.S. arms sales to Pakistan,” warned Kanti Prasad Bajpai, professor at the National University of Singapore. “U.S. civilian nuclear investments in India have been slow. Both sides will want to find ways to get companies to begin to invest. There has been some signs that this could happen, how to speed it up could figure in the talks,” he added.

Kerry arrived in India following a visit to Bangladesh, where security and human rights issues dominated his talks with Prime Minister Sheikh Hasina.

But that agenda could take a back seat in Delhi, despite a wave of fresh violence in parts of India-occupied Kashmir.

“I doubt that Kerry will press Modi at this juncture on Kashmir. India has just signed the Logistics Exchange Memorandum of Agreement (LEMOA) with the U.S., and this is not the time to annoy the Indians,” said Bajpai.

Unlike India, Bangladesh is not an ally or quasi ally so Washington is able to continue criticism of human rights there, Bajpai noted.

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